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This week’s question comes from a longtime reader who wants to make a living the same way I do — getting out of bed in the morning and sauntering over to a computer. But he’s choosing a completely different way of doing it. Instead of writing articles about money, he wants to earn it by trading stocks.
I’m pursuing a career as an active trader and investor and believe that one can make an incredibly good living as an active trader. But from reading your articles on investing you seem to think it’s not a good approach. And I understand that the average day trader loses money. My approach is all-inclusive, ranging from short-term trading to long-term investing, with a great deal of study and practice (paper trading) to go along with it.
In your comments above the list of stocks in your portfolio you say, “I’m an investor, not a trader. In my opinion, trying to time the market is a fool’s game.”
Can you tell me why you said that? I respect your opinion and am interested in what your thoughts are on this, as I’m aggressively pursuing this course for myself. — Dean
Here’s your answer, Dean!
When I started in television news more than 20 years ago, I had no experience, no educational background and no connections in that field. So anything’s possible. And there are people who make a living at virtually everything, from playing golf to lion taming. So I’d be the last to suggest there’s something you can’t do.
But from my experience and observation over many years, making a living trading stocks is tough.
What I’ve seen and experienced
Before adopting TV news as my chosen profession, I was a stockbroker for more than 10 years. During that time, I tried short-term trading for my own account. I failed to consistently make money. Then I formed a partnership with two knowledgeable friends and tried to use a trading strategy we developed to trade index options. It took several months, but we ultimately lost our entire $10,000 pooled investment.
Among my thousand or so clients, I also had a handful who attempted to trade their way to riches. Not one succeeded. Zero.
I had two close college friends who went into the commodities trading business, one in New York and the other Chicago. It took years, but ultimately both failed. I used to know a floor trader in New York who made a killing in silver back in the 1980s. He subsequently lost it all and went bankrupt.
That’s why I said, “I’m an investor, not a trader.” I didn’t form this opinion by reading a book. I attempted to do it on more than one occasion and had my hat handed to me, as did virtually everyone I’ve known or observed over the last several decades. So you’ll understand why I believe that when it comes to trading for a living, I’m skeptical.
At the same time, I’ve found that while trading is a tough way to make money, investing in quality companies over long periods of time isn’t. I’ve demonstrated that right here by publishing every stock pick I’ve made since 2008 in my online portfolio.
Just because I was unsuccessful as a trader doesn’t mean everyone is. Just last week I read an article about a guy who turned $1,500 into $1 million in three years trading penny stocks. Then again, I also read an article about two tickets splitting a $600 million lottery win.
It’s not just me
There’s a mountain of evidence suggesting market timing is tough. For example, despite the fact that mutual funds employ both the smartest people and best technology on the planet, the average professionally managed mutual fund underperforms a simple, unmanaged index.
Then there are the gurus. Wall Street is littered with the bodies of market-timers who thought they had it right, but ultimately got it wrong by missing giant market moves, both up and down.
Among investors still standing, the most famous is Warren Buffett. And he’d no sooner actively trade stocks than chop off his own foot with a dull ax. In fact, he’s said on more than one occasion that his favorite holding period for an investment is “forever.”
Where are you learning it?
I did my first story on day-trading schools at least 15 years ago. These are schools that recruit would-be day traders by promising them that successful short-term trading techniques can be taught — for a hefty fee. Some students may successfully learn techniques to make money, but even the guy I interviewed who owned the school admitted that most lose their money and wash out.
Whether it’s day trading, market timing or any other system to beat the market, when it comes to paying money to learn it, there’s always an unspoken elephant in the room: Namely, if the teachers are so great at it, why aren’t they doing it instead of teaching it? Making a ton of money trading stocks sounds a lot easier than recruiting, charging and teaching others.
In short, the very fact they’re charging to teach it is evidence it doesn’t work well enough to make a living.
The bottom line
As I said at the outset, I’m a firm believer that anyone can do anything they set their mind to. There are people who play poker professionally, and there are people who trade professionally. But they’re few and far between, and in my opinion, have a special gift. They can teach you techniques till the cows come home, but they probably won’t, because they don’t have to. And even if they did, l suspect that, like professional athletes, they’ve got something that can’t be taught.
None of this means, of course, that you shouldn’t learn everything you can about trading, market timing, poker, golf or anything else that interests you. Sharpening your skills is always a great idea. But there’s a big difference between learning to be a better investor and making “an incredibly good living as an active trader.”
If you go forward, Dean, let us know what happens. I’d honestly like nothing more than to be wrong and for you to get rich.
Then maybe you’ll teach the rest of us how you did it.
Got a money-related question you’d like answered?
You can ask a question simply by hitting “reply” to our email newsletter. If you’re not subscribed, fix that right now by clicking here. The questions I’m likeliest to answer are those that will interest other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer. Got any words of wisdom you can offer for this week’s question? Share your knowledge and experiences on our Facebook page.